Profile

Like Father, Like Son

Oak Associates founder Jim Oelschlager at first balked at having son Mark work at the firm, but later changed his mind. And now Mark's stewardship of three funds has shown that there's little risk the father will have to fire his offspring.

Thank You

Error.

Growing up, Mark Oelschlager remembers that his dad, Oak Associates founder Jim Oelschlager, never missed an opportunity to teach him about the value of a dollar. When he was in middle school, his father bought him a tractor so he could make money mowing lawns. "Dad paid for the cost of capital, and I got to keep the revenue," says Oelschlager, 43. When he was off studying economics at Trinity College in Connecticut, his care packages from home included stock-market analysis and company reports.

And yet the senior Oelschlager had no intention of grooming his son to follow in his footsteps, let alone take over the $931 million Akron, Ohio-based asset-management firm he started in 1985. "In fact I was told on the contrary, that I wouldn't work at Oak," says Oelschlager. After getting his M.B.A. at Ohio State University and completing a one-year fellowship, he spent four years as an analyst at the State Teachers Retirement System of Ohio.

"I wanted him to find his own path," says Jim, 69, who is a long-time proponent of managing concentrated mutual-fund portfolios. His firm's flagship
White Oak Select Growth Fund
(ticker: WOGSX) as of May 10 had averaged 7.5% annual returns since its 1992 inception, topping the 7% gains of its large-growth peers. The firm now manages seven no-load mutual funds, all of which tend to invest in just 25 to 40 companies.

BUT IN 2000 JIM HAD a change of heart about hiring family. "Everyone talked about what a great place this was to work, and it occurred to me that Mark shouldn't be precluded from working here," says Jim, who offered his son a job as an analyst with the caveat that he'd have to work harder than everyone else. "I told him it can be dangerous stuff working for your father, particularly if the son doesn't work out and the father has to fire him."

A dozen years later, the elder Oelschlager still isn't playing favorites. When he passes on, "ownership will be divided among all employees," says Jim, who was diagnosed with multiple sclerosis in 1973. Likewise, he says, it isn't a foregone conclusion that his son will become "chief banana."

Still, there's little risk that father will have to fire son. Mark Oelschlager now oversees three funds, including the $81 million
Red Oak Technology Select
(ROGSX), which is up 6% annually since he took it over in April 2006, versus gains of about 4% for its technology-sector peers. Last year the fund was No. 1 in its category, finishing the year up 2.8% when the rest of the group was down 7.6%.

Oelschlager adheres to the same principles as the rest of the firm. With just 35 holdings, the portfolio aims to exploit the firm's best ideas and has a turnover of just 24%. Despite limited trading, its expense ratio is 1.35%. The focus is long term. "You're never going to hear us talking about why we like a particular stock for the next three months," he says. "And you're not going to see us going to 30% cash." Like his father—who avoided the Nifty Fifty in the 1970s when the stocks seemed particularly nifty—Oelschlager tends to eschew anything that's overly popular.

Oak Associates

Red Oak Technology Select

Total Returns*

1-Yr

3-Yr

5-Yr

ROGSX

0.30%

22.78%

5.36%

S&P 500

2.32

15.89

0.30

Morningstar Tech

-5.26

19.06

3.92

% Of

Top 10 Holdings

Ticker

Portfolio**

Accenture

ACN

5.23%

KLA-Tencor

KLAC

4.57

Check Point Software Tech

CHKP

4.45

IBM

IBM

4.16

Northrop Grumman

NOC

4.09

IAC/InterActive

IACI

3.93

CA

CA

3.91

Symantec

SYMC

3.88

Alliance Data Systems

ADS

3.46

Xilinx

XLNX

3.42

Total:

41.10%

*All returns are as of 5/11/12; three and five year returns are annualized. ** as of 03/31/12. Sources: Morningstar; Company reports

Top holding
AccentureACN 0.43834015195791937%Accenture PLC Cl AU.S.: NYSEUSD103.11
0.450.43834015195791937%
/Date(1438376462251-0500)/
Volume (Delayed 15m)
:
2363470AFTER HOURSUSD103.11
%
Volume (Delayed 15m)
:
38676
P/E Ratio
21.98507462686567Market Cap
67061492204.9588
Dividend Yield
1.9784695955775387% Rev. per Employee
107597More quote details and news »ACNinYour ValueYour ChangeShort position
(ACN), which the fund has owned since June 2006, is another example of the kind of company Oelschlager favors. The global consultancy is the go-to source for technology and outsourcing solutions for the world's largest companies. It has a diverse client base, both by industry and geography, and doesn't require a lot of capital "because their people are their capital," he says. But the real attraction for him is its return on equity, which is consistently about 50%. "That's what it all comes down to—free cash flow," he says. Moreover, Accenture has steadily increased its dividend, recently 2.3%, since 2005, even during the recession. And yet, the stock remains cheap. "Compare Accenture's 9% free-cash-flow yield with the 2% yield on a 10-year bond; the gap is staggering," notes the portfolio manager.

As a rule, Oelschlager looks for free-cash-flow yield that's in the high single digits, but he'll make an exception if he thinks a company is investing prudently. That's true of long-time holding
Amazon.comAMZN -0.1136448319546911%Amazon.com Inc.U.S.: NasdaqUSD536.15
-0.61-0.1136448319546911%
/Date(1438376400192-0500)/
Volume (Delayed 15m)
:
2883547AFTER HOURSUSD536.04
-0.11-0.020516646460878484%
Volume (Delayed 15m)
:
142051
P/E Ratio
N/AMarket Cap
250762723337.341
Dividend Yield
N/ARev. per Employee
621733More quote details and news »AMZNinYour ValueYour ChangeShort position
(AMZN), which he says is "plowing money back into its business" with investments in fulfillment centers and its cloud Web-hosting services. Last year its operating margins dipped to their lowest levels since 2001, and in the first quarter of this year those margins were a puny 1.46%. At recent levels, Amazon trades at 86 times forward earnings. Yet, Oelschlager says he's willing to look past disappointing numbers in the short term if a company is well positioned for the long term. "They're building a platform that is almost impossible to replicate," he says.

The same could be said for another large holding,
IntelINTC 0.13836042891732964%Intel Corp.U.S.: NasdaqUSD28.95
0.040.13836042891732964%
/Date(1438376400109-0500)/
Volume (Delayed 15m)
:
26641760AFTER HOURSUSD28.91
-0.04-0.1381692573402418%
Volume (Delayed 15m)
:
517003
P/E Ratio
12.266949152542374Market Cap
137657253627.777
Dividend Yield
3.316062176165803% Rev. per Employee
517816More quote details and news »INTCinYour ValueYour ChangeShort position
(INTC), which the fund has owned since the middle of 2010. As the dominant player in the microprocessor market, it's in an ideal competitive situation, says Oelschlager. Chief competitor
Advanced Micro Devices
(AMD) is "significant enough to keep the antitrust authorities away," but not strong enough to be a significant threat. That competitive advantage translates to excellent returns on capital, he says, yet the stock trades at less than 12 times trailing earnings. Intel isn't alone. "Right now you're seeing a lot of older technology companies trading at depressed valuations," says Oelschlager. "And yet they're still growing."

That's good news for a growth manager who likes to play it safe. "Typically the father is the more cautious one, but in our case it's the opposite," he says. "I'm the conservative one, and he's the maverick."

"I'm inclined to let a position run longer and be a larger part of the portfolio," says Jim, though he appreciates his son's more conservative approach and, occasionally, gives in to his "badgering."